Holding a majority of shares (50.1% or more of the voting stock) grants overwhelming power, but it does not equate to absolute, personal ownership of the business and its assets. This distinction between owning equity and owning the legal entity itself is fundamental to corporate law. The structure serves to protect both the shareholders’ personal wealth and the stability of the company. A corporation is ultimately controlled, but not directly owned, by its shareholders.
The Company as a Separate Legal Entity
A corporation is established as a “juridical person,” a distinct legal entity separate from its founders, employees, and shareholders. This means the company can act on its own behalf in the eyes of the law, much like a natural person. The corporation owns its own property, enters into contracts, and is solely liable for its debts. This separation ensures the company’s assets belong to the entity itself, not to the individuals who invest in it.
The legal liability of the corporation is distinct from that of the shareholders. If the company incurs debt or faces lawsuits, the personal assets of the shareholders are generally protected. This protection is maintained through the “corporate veil,” which shields the owners from corporate liability. Courts can “pierce the corporate veil” and hold individuals accountable in cases of fraud or commingling of finances, but the company is generally treated as a financially independent body.
Understanding Stock Ownership and Rights
A share of stock does not represent a deed to a specific physical asset, such as a building or inventory. Instead, it is a certificate of equity representing a collection of rights and privileges related to the corporation. Shareholders own the stock, which is an interest in the entity, but they do not hold legal title to the company itself.
These rights are generally divided into two main categories: economic rights and governance rights. Economic rights grant the shareholder a claim on the company’s profits, typically distributed as dividends. They also grant a claim on remaining assets upon liquidation after all creditors are paid. Governance rights allow the shareholder to exert influence over the company’s direction, primarily through the ability to vote on major corporate issues.
How Majority Shareholders Exert Control
The power of a majority shareholder stems directly from their control over governance rights and voting power. Owning 50.1% or more of the voting stock allows a shareholder to effectively outvote all others on nearly every issue. This power enables the majority shareholder to determine the composition of the Board of Directors.
By electing a majority of the board members, the controlling shareholder indirectly dictates the company’s strategic direction. Their vote is also typically required to approve fundamental corporate changes, such as amending the corporate charter or approving a merger. While they do not manage day-to-day operations, they hold the ultimate authority to hire and fire the individuals who do.
The Role of the Board of Directors in Management
Once the Board of Directors is elected by the shareholders, it assumes the legal responsibility for the strategic direction and management of the corporation. The board is not typically involved in daily operations but rather sets broad policy and appoints the executive officers, such as the CEO and CFO, who handle the day-to-day running of the business. This structure creates a layer of separation between the ownership (shareholders) and the management (the board and officers).
Board members owe specific legal obligations, known as fiduciary duties, to the corporation and all of its shareholders. The duty of care requires directors to act with the prudence a reasonable person would use, which includes being fully informed before making decisions. They must engage in thorough deliberation and act in an informed manner.
The duty of loyalty mandates that directors act in the best interest of the corporation and its shareholders, prioritizing the company’s welfare over their own personal gain. This duty requires directors to avoid conflicts of interest and refrain from engaging in self-dealing transactions. Even when a director is elected by a majority shareholder, they are legally bound to serve the interests of the entire corporate body, not just the controlling party.
The law often recognizes the “business judgment rule,” which presumes that directors acted in good faith and in the company’s best interest, sheltering them from liability for poor business outcomes. However, this protection is contingent upon the directors fulfilling their duties of care and loyalty. The board’s legal authority to manage the company is what prevents the majority shareholder from simply walking in and taking direct control of corporate assets or operations.
Protections for Minority Shareholders
Although the majority shareholder holds the power to elect the board and influence major decisions, their control is not absolute. State laws and common law principles provide mechanisms to protect minority shareholders from the misuse of that power. This is particularly important in closely held corporations where a minority shareholder cannot easily sell their shares. The concept of “oppression of minority shareholders” addresses actions by the majority that defeat the minority’s reasonable expectations of their investment.
Oppressive Conduct and Derivative Suits
Examples of oppressive conduct include withholding dividends to pressure a minority owner to sell shares cheaply, using company funds for personal expenses, or excluding the minority shareholder from management and access to corporate information. When such abuse occurs, minority shareholders can initiate a derivative lawsuit. A derivative suit allows a shareholder to sue the board or the majority on behalf of the corporation itself when the company has been harmed by misconduct.
Any recovery from a derivative lawsuit goes to the corporation, not the individual shareholder, reinforcing that the claim belongs to the entity. This mechanism ensures the majority shareholder and the board are held accountable to the corporation’s best interests. Courts can order remedies ranging from monetary damages to the forced sale of shares or even the dissolution of the company.
Different Business Structures
The governance principles separating stock ownership from corporate management primarily apply to formal corporations, such as C-Corporations and S-Corporations. These structures are designed for complex organizations that seek outside investment and require a clear hierarchy of authority. The legal separation between the entity and its owners necessitates a formal Board of Directors.
In contrast, Limited Liability Companies (LLCs) offer greater flexibility, often blurring the lines between ownership and control. An LLC provides limited liability protection, but its owners, known as members, can choose to manage the business directly or appoint managers. Since an LLC does not require a formal board, the relationship between ownership and operational control is more direct than in a corporation.